Question

X Company is considering buying a part next year that they currently make. This year's production costs for 3,200 units were as follows:

		Per-Unit	Total
Direct materials		$2.61	$8,352
Direct labor		3.88	12,416
Variable overhead		4.20	13,440
Fixed overhead		5.10	16,320
Total		$15.79	$50,528

A company has offered to supply this part to X Company for $14.14 per unit. If X Company accepts the offer, it will still incur fixed costs of $7,997, but it will be able to lease the resources that will become available from not making the part for $3,000. At what production level would X Company be indifferent between making and buying the part next year?

Answer 1

	Per unit		Total 3200 units
	Make	Buy	Make	Buy
Direct materials	2.61		8352
Direct labor	3.88		12416
Variable overhead	4.20		13440
Avoidable fixed overhead			8323
Opportunity cost			3000
Outside Purchase cost		14.14		45248
Total cost	10.69	14.14	45531	45248
Difference in cost = 45531-45248 = 283
Increase in production level = 283/(14.14-10.69)= 82
Indifferent production level = 3200+82 = 3282
3282 is correct answer